Rio Tinto is clearing the decks to bow out of coal, restructuring its Hunter Valley business and kicking off its staggered exit with the $US606 million ($867 million) sale of a minority stake in one of its three mines in the NSW region to New Hope Group.
Rio is in talks with troubled commodities trader and mining giant Glencore and about half a dozen other potential bidders for its remaining two Hunter Valley mines.
New Hope beat at at least five other bidders to nab Rio’s 40 per cent stake in thermal coal mine Bengalla.
The deal values the mine at $US1.51 billion and marks a win for Rio given it represents a premium to book value at a desperately bad time in the coal market.
Rio has been readying for a coal exit, and this deal with New Hope is the first major move. Deutsche Bank is running the sales process.
Bengalla is the smallest of three Hunter Valley coal mines in which Rio holds stakes.
The others are Mount Thorley Warkworth, and the crown jewel asset called Hunter Valley Operations, which sit right next to each other and could be bundled together in a sale.
Those mines are also next door to Glencore’s Hunter Valley business.
Industry players told Fairfax Media that Rio is expected to sell the rest of its Hunter business by Christmas, and there are two prices on the table, one that includes planning approval for Mount Thorley Warkworth and one without.
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Rio could also look to divest its Queensland coal mines.
M&A
Shaw and Partners analyst Peter O’Connor said on Wednesday the simplification of Rio’s coal unit in NSW positions the miner for further coal M&A. Its best move now would be an asset-based merger in NSW “most likely with adjacent peer, Glencore”.
Rio’s three Hunter operations were housed under its joint venture with Mitsubishi, Coal & Allied. But on Wednesday, the iron ore giant revealed it had restructured Coal & Allied to take full ownership, paving the way for a clean exit from its Bengalla stake – and further asset sales in the Hunter.
Mitsubishi swapped its 20 per cent stake in Coal & Allied for a top-up to its stake in Hunter Valley Operations from 20 per cent to 34 per cent, one of the complexes held under the Coal & Allied business. The deal is significant because it gives Rio full control of its stakes in the Hunter mines, and makes negotiating exits easier.
Bengalla is a low-cost, long-life mine that produces high quality thermal coal and is generating cash even at current dismal thermal coal prices of about $US56 a tonne. The price holds up even when factoring in a solid recovery for depressed thermal coal prices.
New Hope chief executive Shane Stephan told Fairfax Media he had looked at most coal assets up for sale in Australia and western Canada and was paying a “fair price” for Bengalla because it was a quality asset.
“It comes back to value, you only get a bargain typically with an asset that is lower quality,” he told Fairfax Media.
“Full price”
The deal showed the group’s “belief in future of coal markets in Asia and demand for high quality Australian thermal coal”, he said.
Rio analysts backed the deal, with Morgan Stanley saying the miner had achieved a “full price”.
The cash proceeds of the deal will reduce Rio’s debt by about 4 per cent, and analysts say the cash proceeds could cover the dividend.
“Another way to view it is that it covers the $US600 million difference we project between free cash flow and the dividend in 2015,” Morgan Stanley’s Brendan Fitzpatrick said.
Macquarie Research’s Hayden Bairstow wrote that the Bengalla deal could represent a 35 per cent premium for Rio, based on the firm’s $US4.4billion valuation of Rio’s Australian coal business.
Thermal coal is trading about $US56 a tonne, nowhere near the $US150 it was fetching during the boom days of 2011.
Bengalla sits by itself about 45 minutes away from the rest of Rio’s Hunter business, and produced 8.6 million tonnes in 2014. It was also the only coal mine operation where Rio did not have have a controlling interest.
After the restructure, Rio will own the balance of Hunter Valley Operations – 67 per cent – and controlling stakes in Mount Thorley Warkworth. The deal will also give it 100 per cent ownership of the Mount Pleasant coal project, next to Bengalla, which is under review.
Rio and Mitsubishi paid $1.56 billion for the 14 per cent of the Coal & Allied business they didn’t own in 2011, valuing it at $11.1 billion.
Rio’s partners in Bengalla, including Wesfarmers, which has a 40 per cent stake, have a pre-emptive right on the deal but they are unlikely to exercise it. Taipower and Mitsui each hold 10 per cent. New Hope will meet with the project partners in the next few weeks. The deal is expected to close in early 2016.
“We remain focused on continuing to develop the strongest core portfolio of assets in the mining industry,” RioTinto copper and coal chief executive Jean-Sebastien Jacques said in a statement filed in London overnight.
source:theherald.com.au
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